Performance Evaluation and Attribution of Security Portfolios

Chapter 5

Combining Portfolio-Holdings-Based and Returns-Based Performance Evaluation (and the “Return Gap”)

Abstract

This chapter combines portfolio holdings-based and returns-based performance evaluation measures into a comprehensive system of performance evaluation and attribution analysis. It also allows an analysis of the missing performance due to unobserved actions (the “return gap”). The performance of fund managers is decomposed at the portfolio-holdings level into stockpicking, style-timing, and style-based returns. The performance at the net returns level is decomposed into stockpicking returns and expenses. Finally, an approach to estimate trading costs from the periodic portfolio-holdings data is presented. The component models presented ...